Japan, United States and lost decades

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It’s never good to be talking about a “lost decade” when it comes to the economy. Recently, there’s been chatter about the U.S. being in the midst of a lost decade along the lines of Japan’s experience. But could the news be even worse than this analysis suggests?

Consider this grim assessment from a Sept. 19 Reuters story: “As the U.S. economy slouches toward another recession and confidence in policymakers erodes, investors are coming to grips with the notion that the country may already be several years into a Japan-style lost decade. If so, the years ahead could be a very tough slog.” The analysis went on to assert that, due to higher household debt levels and lower savings in the U.S., “in a prolonged period of anemic growth, the U.S. economy may have a slimmer margin for error” than Japan had.

But it needs to be recognized that Japan has failed miserably in navigating economic waters. Japan did not experience merely a lost decade. Instead, its economy has performed poorly for 20 years now.

Recall that Japan was the economic darling of the 1980s. Many “experts” argued that the U.S. needed to become more like Japan in order to be relevant in the coming decades. But Japan’s economy hit the skids in the early 1990s, and has since failed to get back on track.

From 1980 to 1991, Japan’s real annual GDP growth averaged a robust 4.4 percent. Subsequently, though, from 1992 to 2010, real annual growth averaged a mere 0.8 percent. The Japanese economy over the past 20 years has experienced just one year with real growth topping 3 percent, and that was last year’s 4 percent. But that only came after declines of 1.2 percent and 6.3 percent in 2009 and 2010, respectively. For good measure, Japan’s real GDP growth shrank during the first two quarters of this year.

Japan’s economy remains lost.

After getting hit by a credit mess in the early nineties, the response in Japan was to gear up government spending. In 1991, government spending in Japan registered 29.9 percent of GDP, with government debt at 67.5 percent of the economy. While those levels are uncomfortably high, by 2010, spending had risen to 39.8 percent of GDP and government debt came in at 220 percent of the economy.

Keynesian economists, who favor government spending and borrowing as means for spurring the economy forward, argue that if not for this government activism, the Japanese economy would have fallen into a depression. Hmmm, so 20 years of economic stagnation is seen as a victory?

In reality, Japan’s vast expansion of government did nothing to boost the economy. Instead, shifting resources away from the private sector and placing them in political hands, and raising the risk of increased taxes in the future due to an astounding increase in government spending and debt, played key roles in transforming Japan into a no-growth economy.

This is the lesson for the U.S.

In fact, one can certainly argue that the U.S. already has experienced a lost decade. Consider that U.S. real annual GDP growth averaged 3.6 percent from 1950 to 2000. But over the past decade, from 2001 to 2010, real economic growth averaged a mere 1.6 percent. The past four years have been even worse, as average annual growth registered only 0.3 percent from 2007 to 2010. And during the first two quarters of 2011, real growth averaged just 0.7 percent.

Sorry, but that pretty much ranks as a lost decade. And the trend on federal spending and debt has been the same as in Japan.

Consider that federal outlays as a share of GDP came in at 18.2 percent in 2000. By 2007, it had climbed to 19.6 percent. Then with bailouts and attempts at government “stimulus,” spending rapidly ascended to 25.4 percent of GDP by fiscal year 2010, and was expected to top 25 percent of GDP again in the 2011 budget year closing at the end of September. The only period when federal spending stood at higher levels occurred during World War II.

Meanwhile, gross federal debt, which came in at 57.3 percent of GDP in 2000, topped 93 percent in 2010. The Obama budget proposal from earlier this year projected that debt would top 100 percent of GDP next year. That would be the first time this happened since, again, World War II.

By the way, the other similarity with Japan is that, just as with the Federal Reserve, the Bank of Japan has tried to re-energize the economy by keeping interest rates artificially low. But to no avail.

If looking at the cases of both the U.S. and Japan with a clear eye on the ills of government activism, no mystery exists as to what’s needed. Reduce the size of government, get the monetary authorities focused on price stability, and reduce governmental burdens on entrepreneurship, business and investment, namely, make deep and permanent cuts in taxes (especially levies on personal and corporate income, and capital gains), deregulate, and knock down barriers to trade.

Increased government spending and debt as means to economic growth would be laughable, if not for the fact many elected officials actually listen to the economists who suggest such nonsense. The results, unfortunately, are true hardships due to lost decades.

Raymond J. Keating is the chief economist for the Small Business & Entrepreneurship Council. His new book — “Chuck” vs. the Business World: Business Tips on TV — has just been published.